Volatility expected ahead of central bank announcements today
08/Oct/2015 • Currency Updates•
At midday today, the Bank of England will be making its interest rate announcement and releasing the minutes from its latest monetary policy meeting. The key focus will be on the number of dissenters for a rate increase. Additional dissenters from the previous two months would put the central bank on course for a rate hike in early 2016, and provide solid support for GBP today.
This evening the Federal Reserve will release the minutes from its September meeting. Traders will be looking to obtain any clues regarding the possible timing of a Fed interest rate lift-off. However, as the meeting took place before last week’s disappointing labour report, the outdatedness of the minutes could subdue market impact.
Sterling rallied strongly for a second consecutive day against the US Dollar yesterday, appreciating by 0.5% due to impressive output data.
There was mostly positive data across the board in the UK yesterday morning, with industrial production figures coming in particularly high. Output in the industrial sector rose more than economists had anticipated in August, given a sizable boost in gas extraction and the best month for transport equipment since 2011. Production increased by 1% for the month, its largest since mid-2013 and up 1.9% on a year previous. The strong data will be welcome news to the central bank and should some provide support for a rate increase.
Meanwhile, manufacturing production also increased more than forecast for the month, climbing 0.5%, although down 0.8% on a year previous in August. The latest growth forecasts from NIESR also showed that the UK economy grew by 0.5% in the three months to September, as expected.
Focus in the UK today will be solely on the Bank of England, with the interest rate vote and the tone of commentary in the minutes being key to the exact timing of a rate hike, and thus the short term path of Sterling.
The Euro lost ground against the Greenback yesterday, falling by 0.1%.
Yesterday was a quiet day for announcements in the Eurozone with limited economic data to report. The trade balance in France narrowed, boosted by lower imports. Earlier in the day, industrial production in Germany slumped in August, in a further sign that external factors are having an impact on output in Europe’s largest economy. Output in the industrial sector fell by 1.2% in August to mark its second decline in three months.
Sandwiched in between the BoE and Fed announcements, the ECB will also be releasing the accounts from its latest monetary policy meeting at 12:30pm today UK time. The minutes will be scrutinised by investors looking to gain hints of further monetary easing measures from the central bank before year end. Also ECB board member Peter Praet will be speaking at a ZEW conference in Manheim, Germany at midday.
The US Dollar had a mixed session yesterday, finishing only marginally down against its major peers by 0.1%.
Markets in the US were relatively quiet yesterday, with all eyes on today’s Fed minutes release. There was some encouraging news for the housing sector, with mortgage applications surging by an astonishing 25.5% last week. This was the largest weekly increase since applications spiked in January, and second largest weekly increase since 2009.
Meanwhile, Moody’s maintained the US’s triple-A credit rating and stable outlook, although warned of a future downgrading if fiscal policy remained unchanged and US budget deficits and debt ratios increase.
The FOMC minutes are the focal point in the US today. Despite last week’s labour report, any indication of a 2015 interest rate hike by the central bank would likely be positive for the USD when the minutes are released at 7pm London time.
Rest of the world
In line with our forecasts, Asia’s worst performing currencies, the Malaysian Ringgit and Indonesian Rupiah, both strengthened substantially yesterday morning. The Ringgit gained by almost 5% at one stage, boosted by increased exports and an oil price recovery, while the Rupiah climbed to its strongest position in almost two months, after the previous day’s market intervention by Indonesian authorities.
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